It's All About Housing
What I read: The housing theory of everything by Sam Bowman, John Myers, and Ben Southwood. Published September 14, 2021.
Housing is at a crisis point in the United States and much of the Western world. I think everyone is aware of how dire it’s becoming. Home prices are rising to unattainable levels for many buyers. Rents are skyrocketing as landlords take advantage of a tight real estate market. Local governments make things worse with highly restrictive housing construction limitations.
Taken all together it’s a recipe for a horrifically bad housing landscape and something needs to be done or the average person is going to be shoved deeper into financial chaos.
What I had never considered before is that the housing crisis might be at the core of many of our social ills. When I read the article by Bowman, Myers, and Southwood, it opened my eyes considerably. It emphasized to me that if we solve the lack of affordable housing problems, we’ll go a long way toward solving a bunch of other problems too.
Try listing every problem the Western world has at the moment. Along with Covid, you might include slow growth, climate change, poor health, financial instability, economic inequality, and falling fertility. These longer-term trends contribute to a sense of malaise that many of us feel about our societies. They may seem loosely related, but there is one big thing that makes them all worse. That thing is a shortage of housing: too few homes being built where people want to live. And if we fix those shortages, we will help to solve many of the other, seemingly unrelated problems that we face as well.
While I obviously have a vested interest in the housing situation in my country, the writers point out a growing consensus by experts on the topic that housing is far too expensive in most Western countries.
The economic landscape of higher incomes and falling interest rates typically lead to greater supply of expensive and durable goods, thus keeping prices under control. Housing, however, has not kept up. Supply continues to fall short. This is true in American cities and also true in cities like Dublin, Paris, Vancouver, and Barcelona. Most big cities in the Western world are experiencing this dilemma.
In my own city of San Francisco, we’re dealing with a severe housing problem. Many of our city’s processes and restrictions to greenlight the building of new housing is hobbled and the end result is not enough building being done, especially the building of affordable housing. Here and there are success stories, but they are drops in the bucket compared to the amount of housing we actually need built.
San Francisco, like many other cities, is heavily laden with software companies, tech startups, and financial services companies – what the article refers to as “intangible capital.” The high concentration of these types of businesses tend to drive up housing prices even faster and higher than in places where the economies are more focused on durables goods.
One thought that crossed my mind as I read the article was wondering if the newly energized distributed company paradigm fueled by the rapid growth of remote workers changes the need for certain types of workers to concentrate in cities like San Francisco? Only time will tell.
I happen to be an enthusiastic proponent of the remote work approach when it fits an industry, but only the market will ultimately decide if that style of work remains popular. In a recent 60 Minutes interview, the Chief Economist for LinkedIn, Karin Kimbrough, reported that per their data, 1 in 67 jobs was a remote job pre-pandemic. Now? 1 in 7 is a remote job. That’s a huge jump in the number of companies willing to employ remote workers and the current tight hiring market will probably maintain that situation for at least a while longer, and perhaps permanently.
My theory is that the rise in remote work will lead to an easing of the need for workers in select industries like software to concentrate in certain cities. Perhaps this will help housing prices long term, or not. That’s hard to predict.
Anyway, back to the article. One of the shocking bits of data presented is the rise in housing prices over the past 40 years. Average New York City house prices rose 706%. San Francisco is up 932%. London is up 2100% (that’s not a typo). Sydney is up 1450%.
To highlight how out of whack housing prices are compared to how the rest of our economy has functioned, just about every household product from televisions to refrigerators to automobiles are cheaper than they used to be when compared to the number of hours someone needs to work to pay for them.
So just about everything we buy goes down in price, except housing. That means people spend an inordinate amount of their income on housing and that percentage continues to increase. That spells economic disaster for the average inhabitants of the Western world cities.
The article then pivots to some of the negative domino effects of expensive housing. This is the part of the article that surprised me. Well, it didn’t surprise me entirely, but it was definitely not something I fully realized.
Productivity is the first effect the writers discuss.
The obvious effect of expensive housing – people having less money to spend on other things – is the one most people focus on. But it is only part of the story, because expensive housing makes people change their behaviour too – it affects where you live, what your job is, how big your family is and what your day-to-day life looks like too. And it’s these hidden effects that are the most important.
As we’ve described above, better jobs drive up the price of housing when it’s difficult to build more. But that works both ways: when housing is scarce in high-productivity areas, some people are priced out of the area altogether, so they can’t move within range of better jobs.
This means that many people are working in less productive jobs than they could if it was easier for them to move to more productive places. Their wages and productivity are lower and it’s harder for highly productive businesses to hire them. That means people who do get to live in these high-productivity places are less productive than they could be, because they are less able to combine their skills with the complementary skills of the people who have been priced out.
Then I read a rather shocking paragraph and living in one of the three cities mentioned, San Francisco, it immediately rang true. San Francisco and other cities have a host of regulations that restrict building so badly that they end up having a suppressive effect on people’s incomes.
The total cost of this regulation-induced sprawl in the United States may be enormous. According to one study, if just three cities – New York City, San Jose and San Francisco – loosened their rules against building denser housing to the national average level of restrictiveness, millions would move to jobs that made the best use of their skills and total US GDP would be 8.9% higher. This would translate into average American wages being $8,775 higher per year. Others go even further. Duranton and Puga estimate that the average income gain from a housing regime that allowed easy building could be around 25%, or around $16,000 more per person per year.
Here in San Francisco we do have legislators and community leaders who are pushing to loosen our sometimes arcane building restrictions, but it’s not enough. I consider the affordable housing shortage a local and national emergency and chipping away at it with tweaks and nudges to regulations when they should be scrapped or revised in their entirety is something city leaders need to embrace. I hope there is the collective will to do this.
The next effect of a lack of affordable urban housing is a reduction in the level of innovation. The writers state that nearly all breakthrough innovation takes place in cities. My own San Francisco Bay Area with its Silicon Valley was offered as one example of such an innovation hub. So if people can’t afford to live in one of these innovation hub cities, it impacts not only productivity but also innovation.
Again, I wonder if the rise of remote work will buffer this innovation reduction effect? Perhaps. Again, time will tell as the data rolls in during the coming years around productivity and innovation within the companies that have embraced remote work.
As I walk around my own Castro neighborhood in San Francisco, the evidence of rapid gentrification is clear. Every home seems to be sold for a far higher price than just months prior. Apartment rental prices are again climbing to unaffordable levels. There is almost no new building of housing going on in my neighborhood. Such fixed supplies of housing mean that any rise in people’s incomes end up going to landowners. This is yet one more example of how the growth in wealth inequality is getting worse.
A clever solution the writers propose is to perhaps encourage more building of housing by letting the neighborhood residents themselves vote on such projects. If they want increased density, they can vote to do so. My own experience in San Francisco is that neighborhood associations are often a major roadblock to adequate housing construction projects. Those associations are often populated with a handful of landowners who simply want to not see any change. If a policy of allowing an entire neighborhood to vote were implemented, it would be a better representation of the true desires of all the residents.
Across the Western world it is housing inequality and not income inequality that primarily determines the extent of wealth inequality. We need to solve this problem or it’s going to keep getting worse.
Low earning people seeing the housing realities in front of them are not motivated to move to higher earning cities where they could see a dramatic rise in their incomes. So much of the additional income would go toward housing that it’s possible their standard of living would fall.
One example of how disruptive this situation can be is among teachers. Teachers often can’t afford to live in the city in which they teach. They, along with a host of other lower income earners, are priced out of expensive cities and it becomes harder to lure better educated and skilled people to those jobs. The occasional housing project here or there, or rules or legislation that fall short of supplying an adequate amount of housing to these people, aren’t enough. We need more aggressive approaches.
Expensive housing prices also reduce the mobility of workers, especially those at the lower earning end of the spectrum.
Want to start and grow a family with a child or two? This becomes harder when housing prices crush people into the smaller spaces they can afford that do not provide enough space for new children. Higher income people can afford to have more children because they can afford bigger homes and childcare while poorer people do not have those luxuries available. One study determined that a 10% rise in house prices resulted in 1.3% fewer overall births.
The writers then talk about the impact of less dense housing sprawl on health, obesity rates in particular. I live in San Francisco, one of the most walkable cities in the country. I don’t own a car. Many here don’t. We walk a lot. Even when we use transit options we walk to and from them. Walkable cities make people healthier (and more social with each other).
While the article admits there are likely many factors contributing to the incredible rise of obesity in America, some of the data points to it being about where Americans live that are often car cultures with very little walking taking place. Having lived in Los Angeles for many years where most errands and commutes are done by car, I witnessed how much it can reduce walking. When I lived in Chicago and New York City I walked everywhere, and again did not need to own a car.
In addition to health ramifications, fostering a car culture also points to yet another negative impact of housing prices, adding to our climate change woes.
Walkable cities are not just important to combat obesity. In 2018, the average Japanese person’s consumption caused 10.3 tonnes of CO2 emissions, while the average American caused 17.6 tonnes of emissions, or 74% more. Focusing on transport, we can see how much of that is explained by Japan’s denser, transit-rich, more walkable cities. In 2016 transport accounted for 1.63 tonnes in Japan, versus 5.22 tonnes in the US – over three times worse.
Maps of the UK and US East Coast show clearly how the densely populated parts of cities like New York, Philadelphia and London emit far less carbon per head than the rest of the surrounding sprawl. The UK’s Centre for Cities estimated that people living outside cities accounted for 50% more carbon emissions than those living inside them.
Many of the cities that dense urban residents are moving to lately are cheaper areas with much more urban sprawl and warmer temperatures. That results in more emissions from cars and air conditioning that further add to climate change.
Even our current toxic and polarized political situation might have some roots in the housing price problems. Some of the data suggests that very thing.
It is possible that even the political and culture wars being waged in many Western countries have their roots in housing shortages, as a recent report for The Economist argued. Elections in the English-speaking world are increasingly becoming divided between relatively prosperous and well-educated citizens of cities and their suburbs on one side and people in the rest of the country – rural areas and economically depressed towns – who resent the perception that the system is rigged in favour of the already well-off. Britons and French people living in areas where house prices were stagnant were more likely to vote for Brexit or the National Front respectively.
The writers end the article with this.
If we’re right about this, it means that fixing this one problem could make everyone’s lives much better than almost anyone realises – not just by making houses cheaper, but giving people better jobs, a better quality of life, more cohesive communities, bigger families and healthier lives. It could even give renewed reasons to be optimistic about the future of the West.
I hope each of us do what we can to address this situation. In particular, we need to pressure elected officials to change housing construction regulations and processes to build more affordable housing more quickly. We need to start the flow of money moving more in the direction of the general population and not so concentrated in the hands of big landowners and the wealthy.
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